Businesses Say UI Rate Hike Would Hobble Growth (Boston Business Journal)

January 23, 2009

by Jackie Noblett

Business leaders are once again calling for a freeze in unemployment insurance rate increases for 2009, saying higher premiums would throw cold water on already struggling businesses.

But state officials and independent watchers say a rate freeze could have a dangerous effect on the state’s unemployment insurance fund, which is bearing the burden of burgeoning unemployment rolls. Some analysts call the fund “marginally solvent.”

The UI fund, which Massachusetts employers pay into, is used to provide unemployment insurance benefits to individuals who are laid off from their jobs. At year’s end, the fund stands at about $1.2 billion.

The rate that employers pay is based on two factors: how often an employer lays off workers, and how solvent the fund is. The state examines the ratio of fund balance to payouts yearly and determine the range of unemployment tax rates businesses must pay.

Bay state businesses are on the hook for a $111 million unemployment insurance premium hike for 2009, as the state determined it needed to set a costlier tax rate range to maintain a healthy fund balance.

Business leaders say this system is antiquated, and a rate freeze would have a negligible impact on the solvency of the fund and no impact on those collecting benefits.

“It has zero effect on unemployment benefits to workers,” said Christopher Anderson, president of the Massachusetts High Technology Council. “The fact that we need a rate hike proves the system itself needs retooling. Other technology competitor states have 40 percent to 70 percent lower unemployment costs.”

Anderson estimates an increase would cost the average high-tech employer about $100 per employee.

“This is a significant barrier for job growth,” he said.

Officials in the Executive Office of Labor and Workforce Development disagree on the impact of a rate freeze. “If we stay on (the same tax rate range), we may be in some trouble,” said Robb Smith, director of policy in the office.

Some groups warn the fund balance will dwindle if unemployment rates continue to rise. In October, the National Employment Law Project, a group that works with employment lawyers, called Massachusetts’ unemployment system “marginally solvent” with about 11 months worth of payouts in reserve. The group opposes rate freezes because they endanger a system designed to adjust payments based on an appropriate reserve amount.

Massachusetts’ UI fund balance has recovered significantly since the last recession, which nearly drained the fund. In 2003 and 2004, legislators and business leaders agreed to a rate hike, equivalent to the doubling of UI premiums over two years, to prop up the system.

Business leaders say the high unemployment taxes, combined with the specter of even higher rates, further discourages businesses to grow and add jobs in the area. In a recent report by Washington, D.C-based think tank the Tax Institute, Massachusetts has the second highest unemployment tax rates in the country.

Beacon Hill legislators have passed rate freezes in the past, most recently in 2008. This year, Senate Minority Leader Richard Tisei filed legislation freezing rates for 2009.

“I’m extremely concerned about the business climate in Massachusetts,” said Tisei, R-Wakefield. “Businesses are already under pressure.”

The debate on rate freezes is just one part of the larger philosophical debate on the generosity of unemployment benefits compared with other states and how those benefits are funded.

Massachusetts law allows workers who were employed at least 15 consecutive weeks to collect up to 50 percent of pay, or a maximum of $600 a week before added funds for dependents are figured in. Workers can collect state-funded unemployment for 30 weeks, with federally funded extensions adding up to 13 more weeks.

Most other states provide benefits to workers employed at least 20 consecutive weeks for up to 26 weeks, not including federal extensions, according to the U.S. Department of Labor.

Business groups have been calling for changes to Massachusetts law that would lower benefits to be in line with other states.

“Those kinds of reforms would save hundreds of millions of dollars,” said Brian Gilmore of the Associated Industries of Massachusetts, another group opposing UI rate changes.